Background:-The Finance Act, 2004 introduced section 111A in the Income-tax Act, 1961 (the Act) prescribing a tax rate of 10 percent on Short Term Capital Gains (STCG) arising from sale of shares on or after 1 October 2004 on a stock exchange which are subject to Securities Transaction Tax (STT).
Before this amendment the STCG arising to non-residents (up to 30 September 2004) was taxable at the rate of 30 percent under the provision of section 115AD of the Act.
Recently, the Mumbai Income-tax Appellate Tribunal (the Tribunal) in the case of First State Investments (Hongkong) Ltd. [A/C First State Asia Innovation & Technology Fund] v. ADIT (2009-TIOL-547-ITAT-MUM) dealt with the issue of set off of Short Term Capital Loss (STCL) incurred from sale of shares on or after 1 October 2004 against STCG arose up to 30 September 2004. The Tribunal held that STCL (if gains then they are subject STT and to be taxed @ 10 percent) incurred on or after 1 October 2004 can be set off against the STCG (not subject to STT and to be taxed @ 30 percent) arose up to 30 September 2004.
Facts of the case
- The taxpayer was a non-resident and registered with SEBI as a sub account of First State Investment (Hongkong) Limited, which was registered as Foreign Institutional Investor. During the year the taxpayer earned income from capital gains on sale of shares. At the time of calculating the amount taxable under the head capital gains, the taxpayer set off STCL subject to STT first against STCG not subject to STT and offered the balance STCG to tax.
- However, the Assessing Officer (AO) contended that the taxpayer had wrongly set off the STCL subject to STT against the STCG not subject to STT with the object of reducing the incidence of tax payable on STCG. Accordingly, the AO rejected the taxpayer’s calculation and calculated the net STCG after setting off against each category separately.
The computations prepared by the taxpayer and adjusted by the AO are given below:
Computation by taxpayer
